Mortgages - A Return to Rationing

Rationing is a means by which demand and supply can be brought into a degree of balance. There are plenty of ways in which rationing can take place – for example by suppliers offering products on a first-come first served basis, or through auctions, allocated on the basis of an assessment of need or through the issue of rationing coupons as we saw in the second world war.

During the years of easily available finance for purchasing a house, mortgage rationing has barely existed – only to the extent that the price (the mortgage rate) acted as a device to limit the effective demand from prospective home-buyers. But now rationing is firmly back in the news.

And this time the reason is not an unprecedented level of demand.

Instead rationing in the form of rejected mortgage applications is happening because of the exit of suppliers from the mortgage market. And a general decline in the volume of funds available to lend.

This BBC news article reports Michael Coogan, director general of the Council of Mortgage Lenders (CML) as saying that “there were fewer active lenders - and with less money.”

So even though the cost of a mortgage is falling once more – and the Bank of England is expected to cut interest rates again tomorrow at its December meeting – getting a home loan is becoming tougher by the month.

The rationing of credit on this scale is something that the current generation of first time buyers will not have experienced before. But for those brought up with the expectation that one had to save for many years with a bank or a building society before they would consider you sufficiently credit worthy to be given a long-term mortgage, this is just a return to the good old days!

Rationing supply of mortgage finance is another reason why I expect that the house price slump still has a very long way to go. Be wary of people calling time on the property recession when average prices fall by less than one per cent in a month. The pace of house price declines is set to accelerate once more as we head into 2009 because of the effects of a significant jump in the number of people who are out of work. Net lending to home buyers is likely to become negative in the next few months.